Globalization is all about profits, but should be about taxes too

Major corporations are gaming one nation’s taxpayers against another’s: What is needed is an international tax system to make them pay their fair share

By Joseph Stiglitz / The Guardian, LONDON

The world looked on agog as Apple Inc chief executive Tim Cook said his company had paid all the taxes it owed — seeming to say that it paid all the taxes it should have paid.

There is, of course, a big difference between the two.

It is no surprise that a company with the resources and ingenuity of Apple would do what it could to avoid paying as much tax as it could within the law. While the US Supreme Court seems to have said that corporations are people, with all the rights attendant thereto, this legal fiction did not endow corporations with a sense of moral responsibility.

Apple, like Google Inc, has benefited enormously from what the US and other Western governments provide: highly educated workers trained in government-supported universities. The basic research on which their products rest was paid for by taxpayer-supported developments — including the Internet, without which they could not exist.

Their prosperity depends in part on the West’s legal system — including strong enforcement of intellectual-property rights.

Yes, they brought genius and organizational skills, for which they justly receive kudos. However, while Isaac Newton was at least modest enough to note that he stood on the shoulders of giants, these titans of industry have no compunction about being free riders. Without public support, the wellspring from which future innovation and growth will come will dry up — not to say what will happen to our increasingly divided societies.

It is not even true that higher corporate tax rates would necessarily decrease investment. As Apple has shown, it can finance anything it wants to with debt. However, interest payments are tax deductible — which means that to the extent that investment is debt-financed, the cost of capital and returns are both changed commensurately, with no adverse effect on investment.

It is time the international community faced the reality: We have an unmanageable and unfair global tax regime.

It is a tax system that is pivotal in creating the increasing inequality that marks most advanced countries today — with the US standing out in the forefront and the UK not far behind. It is the starving of the public sector which means the US is no longer the land of opportunity — with a child’s life prospects more dependent on the income and education of its parents than in other advanced countries.

These international corporations are the big beneficiaries of globalization — not the worker who has seen his income fully adjusted for inflation. Multinationals have learned how to exploit globalization in every sense of the term — including exploiting the tax loopholes that allow them to evade their global social responsibilities.

The US could not have a functioning corporate income tax system if it had elected to have a transfer price system (where firms “make up” the prices of goods and services that one part buys from another, allowing profits to be booked to one state or another).

As it is, Apple is evidently able to move profits around to avoid Californian state taxes. However, there is plenty of room to further fine-tune the system in response to the easier ability to shift profits around when a major source of the real “value-added” is intellectual property.

Some have suggested that while the sources of production are difficult to identify, the destination is less so; they suggest a destination-based system. However, such a system would not necessarily be fair — providing no revenues to the countries that have borne the costs of production. Yet, a destination system would clearly be better than the current one.